Verizon may spend more than $5 billion subsidizing iPhone sales in 2011

Analysts say Verizon will spend billions this year to make it easy for customers to sign up for data contracts with Apple's iPhone.

According to a report by Bloomberg, Verizon's estimated $3 to $5 billion in iPhone subsidies will initially cut into the carrier's profits in the hopes of adding millions of new smartphone users to its subscriber base.

Verizon to outpace AT&T in subscriber growth for the first time since 2008

John Hodulik, the same UBS AG analyst who said he expected iPhone "to be the dominant device at Verizon as soon as its launched, and, I think, cannibalize the other devices they sell," estimates that Verizon may sell 13 million iPhones this year with a device subsidy of $400 each. That would amount to $5.2 billion.

As a consequence, Hodulik said, we expect margins to be down pretty meaningfully in the first quarter and second quarter."

Verizon will earn back the value of those subsidies in its two year contracts, which run between $70 and $120 per month for packages of voice, data and text messaging. Tethering contracts add another $30 per month per smartphone user.

Across two years, carrier charges for a smartphone (without tethering) amount to between $1680 and $2880 per user, making the initial investment in subsidies well worth the $28 to $49 billion Verizon would rake in from serving all those new iPhone users over the next two years.

Verizon's subsidized iPhone sales should help it add 2.1 million new subscribers this year, Hodulik said. In contrast, AT&T is estimated to only add 650,000, making this year "the first time that Verizons subscriber growth will outpace its largest rival since 2008."

Competition may cut iPhone subsidy

James Ratcliffe, an analyst at Barclays, estimates that Verizon will sell just 9 million iPhones this year, spending $350 to subsidize each sale, for a total of $3.2 billion.

Ratcliffe also expects AT&T to sell just six million iPhones this year, down from around 15 million last year. He also figures that AT&T's subsidy will drop from $400 to $350 per device due to the end of its exclusive deal with Apple.

However, Verizon was rumored to have asked Apple to keep the iPhone exclusive to it and AT&T, locking out Sprint and T-Mobile from also carrying it in the US.

Subsidies hide hardware costs

The report cited iSuppli analyst Tina Teng as saying that the iPhone commands a $400 subsidy that's higher than most other smartphones, which may range from $200 to $400. She expects Verizon will pay the same subsidy AT&T did, but added that subsidies in general should fall as more smartphones enter the market.

Subsidies tend to erase the differences in upfront cost among mobile phones, but by negotiating a higher subsidy due to the appeal of the iPhone, Apple can make it even harder for other phone makers to compete in a pure "race to the bottom" in cost.

That's the opposite of what Apple experienced two decades ago, when it struggled to sell its premium priced, higher quality Macs against cheaper, simpler PCs that lacked features like motorized disk drives, built in audio and SCSI interfaces, and better operating system software. Apple's retail partners back then actively pushed would-be Mac users to buy PCs, creating a monoculture tended by Microsoft's Windows.

While many observers expected this situation to repeat with the arrival of broadly licensed mobile operating systems, a variety of situations have changed. Because mobile phones are sold through carriers who subsidize handset purchases to induce subscribers to buy more expensive data contracts, Apple doesn't have to feel pressured to deliver lower quality products just to stay in the game.

At the same time, Apple also benefits from the iPod's economies of scale, particularly in regards to RAM and application processors, making it harder for competitors to copy the iPhone at a significantly lower cost. Hardware makers selling devices running Microsoft's Windows Phone 7 or Google's free Android OS aren't selling devices that are noticeably cheaper than the iPhone.

Apple is now offering the iPhone 3GS for just $49 with a contact from AT&T, making it essential for Verizon to heavily subside new iPhone 4 sales in order to be competitive with AT&T's hardware prices, while also taking away much opportunity for Android or WP7 devices to compete purely on upfront hardware prices.

Smartphone data plans drive subsidies

Prior to the iPhone, Verizon and other carriers preferred to offer subscribers very cheap phones that could be offered for free with a $100 to $200 subsidy. Those phones did not encourage users to opt for more expensive data plans however.

By pushing more advanced phones to users with aggressive subsidies, AT&T and Verizon have been competing to grow the proportion of their smartphone users, and subsequently earn at least two to three times as much per subscriber per month.

Verizon tried to duplicate AT&T's smartphone success first via RIM's BlackBerry, then with Android phones last year, before deciding to join Apple in selling the iPhone, a move which is expected to be announced tomorrow.

Verizon subsidizes every phone it sells so these numbers are kind of exaggerated.

The interesting number is what sort of premium the iPhone is getting, not that we know that, and then multiply that times units. How much more is Verizon paying for an iPhone 4 versus a Droid X? $100 bucks more? Times 10 M devices that would be $1B upfront. $150 premium would be $1.5B.

Also, some accounting should be made for all the ad spending Verizon has done for the Droid brand. Bet that ad spend is considerable and may be comparable to the premium they are spending on the iPhone.

That's the opposite of what Apple experienced two decades ago, when it struggled to sell its premium priced, higher quality Macs against cheaper, simpler PCs that lacked features like motorized disk drives, built in audio and SCSI interfaces, and better operating system software. Apple's retail partners back then actively pushed would-be Mac users to buy PCs, creating a monoculture tended by Microsoft's Windows.

There has, and always will be, high-end PC hardware priced similarly to Apple's hardware. Let's not paint all PCs with the stigma of being cheap and simple when plenty of them are not. (though there are plenty of crappily done PCs out there, for sure)

And calling Macs "higher quality" ignores a lot of the picture. The supposedly "premium" Macs Apple was producing in the mid 1990s were pretty bad, with a pretty substandard OS compared to Windows.
Even now, with an exponentially better OS than the classic Mac OS, it's not all wonderful in the land of Mac hardware. Apple shamelessly uses cheaper, lower-quality notebook disc drives, graphics hardware, and optical drives on its desktop products. Apple's offerings on video hardware for its Mac Pros are limited and lackluster compared to options on high-end PCs, and Apple has been terrible at supporting recent iterations OpenGL on its releases of OS X. Apple as of late also has been slow on implementing standards into its Macs (Bluray and USB 3.0 spring to mind, though I'm willing to let USB 3.0 slide as Intel's failure).

Quote:

Originally Posted by AppleInsider

At the same time, Apple also benefits from the iPod's economies of scale, particularly in regards to RAM and application processors, making it harder for competitors to copy the iPhone at a significantly lower cost. Hardware makers selling devices running Microsoft's Windows Phone 7 or Google's free Android OS aren't selling devices that are noticeably cheaper than the iPhone.

For many of its mission-critical parts on iDevices, Apple buys from Samsung, which sells premium Android smartphones on all four major US carriers. So Apple's economies of scale are hardly unique, seeing as its own A4 processors are made by the same company that makes the competing Galaxy S phone.

Though I don't know where LG, HTC, Motorola, etc., source their parts

Quote:

Originally Posted by AppleInsider

Verizon tried to duplicate AT&T's smartphone success first via RIM's BlackBerry, then with Android phones last year, before deciding to join Apple in selling the iPhone, a move which is expected to be announced tomorrow.

A bunch of Verizon Android LTE handsets were just unveiled this past week at CES. Saying that Verizon "tried" (past tense) to duplicate AT&T's success with Android is silly. Assuming a Verizon iPhone is launched tomorrow, Verizon is quite wise to promote both platforms in case one falters or fails

Quote:

Originally Posted by ghostface147

I am wondering how legal it is to pay someone to lockout competitors. I understand exclusivity on a phone, but to say we'll pay you to not have it on T-Mobile or Sprint? That doesn't seem right.

There isn't any effective difference between 1 carrier exclusivity and 2 carrier exclusivity. Unless Apple / Verizon / AT&T get hauled before the SEC and lose their case, there's nothing that compels Apple to sell the iPhone on any particular carrier. If Apple agrees to not let Sprint or T-Mobile have the iPhone, that's their business decision

Quote:

Originally Posted by Patranus

Ug. So the iPhone user gets screwed again with a $30 tethering deal.
Why can't Steve just allow us to use them as WiFi hotspots like Android.

Verizon doesn't. Though WiFi hotspots were a headline feature for Android 2.2, carriers can disable it, and Verizon did exactly that in the 2.2 update to the original moto Droid (the newer moto handsets have the tethering feature enabled). More reason for android owners to get rid of the badly-skinned, carrier-bloatware-laden default Android builds and replace them with community-developed builds from the public Android source code.

This brings up another gripe of minehow is it not ridiculous that carriers charge for tethering? If I buy 2GB of data for the month, why should AT&T care if I download 1.9 GB of data to my phone v. 1 GB of date to my phone & .9 GB of data to my laptop?

There has, and always will be, high-end PC hardware priced similarly to Apple's hardware. Let's not paint all PCs with the stigma of being cheap and simple when plenty of them are not. (though there are plenty of crappily done PCs out there, for sure)

And calling Macs "higher quality" ignores a lot of the picture. The supposedly "premium" Macs Apple was producing in the mid 1990s were pretty bad, with a pretty substandard OS compared to Windows.
Even now, with an exponentially better OS than the classic Mac OS, it's not all wonderful in the land of Mac hardware. Apple shamelessly uses cheaper, lower-quality notebook disc drives, graphics hardware, and optical drives on its desktop products. Apple's offerings on video hardware for its Mac Pros are limited and lackluster compared to options on high-end PCs, and Apple has been terrible at supporting recent iterations OpenGL on its releases of OS X. Apple as of late also has been slow on implementing standards into its Macs (Bluray and USB 3.0 spring to mind, though I'm willing to let USB 3.0 slide as Intel's failure).

For many of its mission-critical parts on iDevices, Apple buys from Samsung, which sells premium Android smartphones on all four major US carriers. So Apple's economies of scale are hardly unique, seeing as its own A4 processors are made by the same company that makes the competing Galaxy S phone.

Though I don't know where LG, HTC, Motorola, etc., source their parts

A bunch of Verizon Android LTE handsets were just unveiled this past week at CES. Saying that Verizon "tried" (past tense) to duplicate AT&T's success with Android is silly. Assuming a Verizon iPhone is launched tomorrow, Verizon is quite wise to promote both platforms in case one falters or fails

There isn't any effective difference between 1 carrier exclusivity and 2 carrier exclusivity. Unless Apple / Verizon / AT&T get hauled before the SEC and lose their case, there's nothing that compels Apple to sell the iPhone on any particular carrier. If Apple agrees to not let Sprint or T-Mobile have the iPhone, that's their business decision

Verizon doesn't. Though WiFi hotspots were a headline feature for Android 2.2, carriers can disable it, and Verizon did exactly that in the 2.2 update to the original moto Droid (the newer moto handsets have the tethering feature enabled). More reason for android owners to get rid of the badly-skinned, carrier-bloatware-laden default Android builds and replace them with community-developed builds from the public Android source code.

This brings up another gripe of minehow is it not ridiculous that carriers charge for tethering? If I buy 2GB of data for the month, why should AT&T care if I download 1.9 GB of data to my phone v. 1 GB of date to my phone & .9 GB of data to my laptop?

For many of its mission-critical parts on iDevices, Apple buys from Samsung, which sells premium Android smartphones on all four major US carriers. So Apple's economies of scale are hardly unique, seeing as its own A4 processors are made by the same company that makes the competing Galaxy S phone.

Though I don't know where LG, HTC, Motorola, etc., source their parts

Samsung supplies Apple with a portion of its flash chips and I believe they are second only to Intel in terms of chip production so they certainly enjoy economies of scale as far as chip production goes. I'm not sure how they stand on other components, but they currently have twice the revenue Apple has, so they are a formidable competitor.

I believe LG spun off its mobile phone division as a separate company and are now only loosely affiliated with the rest of LG. They sell a large number of phones, however that is spread over a large variety of models and the majority of their sales, so they don't have the economies of sales Apple has.

I'm not sure where Motorola currently stands in terms of chip production. Motorola chips were used in the original Mac's, but I don't think they are a major player any more. And of course they don't sell nearly as many units as Apple.

I'm not sure if HTC does anything other than mobile devices, but that is what the are known for and their sales pale in comparison to Apple's.

I'm too tired to second check any of the facts I stated, so if I'm wrong on anything, call me on it.

I live in Australia and all carriers have the iPhone and in my experience Android phones are still a rarity (which seem to backed-up by the sales data).

In Australia, Telstra has the best network by far. Just before the release of the iPhone 4 Telstra dropped prices on its plans. I now enjoy the best phone on the best network which has made such a difference.

So if Verizon network is as good as everyone says Android will no longer have a reason to exist and will relegated to your second tier networks for geek customers only.

Android phones will end up in the land of lost toys :-(

Hello Australia

And be joined by Windows PCs over the next few years.

I think iPad will soon convert most casual PC users once they realize it does everything and more they always wanted their PC to do but never did (well).

From Apple ][ - to new Mac Pro I've owned them all.Long on AAPL so biased"Google doesn't sell you anything, Google just sells you!"

This brings up another gripe of minehow is it not ridiculous that carriers charge for tethering? If I buy 2GB of data for the month, why should AT&T care if I download 1.9 GB of data to my phone v. 1 GB of date to my phone & .9 GB of data to my laptop?

Well, in fact it is ridiculous. Here in Austria my carrier (T-Mobile) charges no additional fee for tethering my iPhone. But competitors in here do.

However, ridiculous as it is from our point of view, I can see the point of the carriers. If you really download 1.9 GB to your phone every month there is nothing to discuss about. But be honest. Do you really download 1.9 GB a month with your phone? I would say, you don't. And that's the point.

The carriers give you a limit of let's say 1 or 2 GB a month and they know, that you most probably won't use it to the extend. If you stick to your phone that is.

If you tether however... well that's another story.

And that's what they are calculating, when offering you a specific plan. They give you a limit, knowing that you will only use a quarter or half the traffic you theoretically can do. If you stick to the phone.

But from our point of view it is ridiculous, that's where you are right.

Well, in fact it is ridiculous. Here in Austria my carrier (T-Mobile) charges no additional fee for tethering my iPhone. But competitors in here do.

However, ridiculous as it is from our point of view, I can see the point of the carriers. If you really download 1.9 GB to your phone every month there is nothing to discuss about. But be honest. Do you really download 1.9 GB a month with your phone? I would say, you don't. And that's the point.

The carriers give you a limit of let's say 1 or 2 GB a month and they know, that you most probably won't use it to the extend. If you stick to your phone that is.

If you tether however... well that's another story.

And that's what they are calculating, when offering you a specific plan. They give you a limit, knowing that you will only use a quarter or half the traffic you theoretically can do. If you stick to the phone.

But from our point of view it is ridiculous, that's where you are right.

I can see what you are saying and it kind of make sense except if I could tether here in the USA I am sure it would not be used very often. Only when totally unable to get access to wi-fi and in any one month that (for me at least) would not be very often. So a free service with a modest limit would be welcome as an emergency system I guess I'd call it.

Apple should offer an option (kind of like Plane Mode) called Tethered Mode that makes all videos and large files a click to load option similar to mail seen in the Junk folder.

From Apple ][ - to new Mac Pro I've owned them all.Long on AAPL so biased"Google doesn't sell you anything, Google just sells you!"

I can see what you are saying and it kind of make sense except if I could tether here in the USA I am sure it would not be used very often. Only when totally unable to get access to wi-fi and in any one month that (for me at least) would not be very often. So a free service with a modest limit would be welcome as an emergency system I guess I'd call it.

Apple should offer an option (kind of like Plane Mode) called Tethered Mode that makes all videos and large files a click to load option similar to mail seen in the Junk folder.

Apple doesn't set or design the rate plans, the carriers do, so bug or complain to the carriers, not Apple.

"A common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools." Douglas Adams

James Ratcliffe, an analyst at Barclays, estimates that Verizon will sell just $9[sic] million iPhones this year, spending $350 to subsidize sales, a total of $3.2 billion.

Ratcliffe also expects AT&T to sell just six million iPhones this year, down from around 15 million last year. He also figures that AT&T's subsidy will drop from $400 to $350 per device due to the end of its exclusive deal with Apple.

is implying no unit growth in America for iPhones - and as the smart phone market will grow he is saying that despite ( maybe because) moving to Verizon Apple's market share may half. I dont believe that.

In the kerfuffle about plans noone seems to have noticed this is implying no unit growth in America for iPhones - and as the smart phone market will grow he is saying that despite ( maybe because) moving to Verizon Apple's market share may half. I dont believe that.

I don't believe that either. Here in Austria the iPhone started with one carrier (T-Mobile) as well. Now we have four carriers offering the iPhone. That's good for the customer. More choices, better plans because of the stiff competition. And that's good for Apple too. Because they obviously sell a lot more iPhones than just with one carrier (in here I have statistics, that suggest, that a certain government website receives two thirds of its mobile hits from iOS devices).

In short: One analyst - one opinion. A Zillion analysts, a zillion opinions. Let's wait and see.

Apple doesn't set or design the rate plans, the carriers do, so bug or complain to the carriers, not Apple.

If you actually read what I wrote I made no complaint whatsoever. I was suggesting an option that allowed Safari to operate in a special 'mode' by not down loading large graphics and videos to save bandwidth when operating in tether mode and a user option to override when required. Thus allowing more use of tethering when needed before hitting carrier caps. I suggest you adopt a nicer tone too. Also take heed of your own footer.

From Apple ][ - to new Mac Pro I've owned them all.Long on AAPL so biased"Google doesn't sell you anything, Google just sells you!"